Penningmängden

Now, why is the velocity of money slowing down?
Notice the significant real rise in velocity from 1990 through about 1997.
Growth in M2 was falling during most of that period, yet the economy was growing.
That means that velocity had to have been rising faster than normal.
Why? It is financial innovation that spurs above-trend growth in velocity.
Primarily because of the financial innovations introduced in the early '90s,
like securitizations, CDOs, etc., we saw a significant rise in velocity.

And now we are watching the Great Unwind of financial innovations,
as they went to excess and caused a credit crisis. In principle,
a CDO or subprime asset-backed security should be a good thing.
And in the beginning they were. But then standards got loose, greed kicked in,
and Wall Street began to game the system.
End of game.

What drove velocity to new highs is no longer part of the equation.
The absence of new innovation and the removal of old innovations
(even if they were bad innovations, they did help speed things up)
are slowing things down. If the money supply had not risen significantly
to offset that slowdown in velocity, the economy would already be in a much deeper
recession.

When will they know when enough is enough? When the velocity of money stops falling.
When we see two quarters in a row where the velocity of money is rising,
then it is time to start investing in inflation hedges.

Elements of Deflation, Part 2

?No warning can save a people determined
to grow suddenly rich.? - Lord Overstone